Thackray Newsletter. Know Your Buy & Sells a Month in Advance. Published the 10th Calendar Day of Every Month

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1 Thackray Newsletter Know Your Buy & Sells a Month in Advance Published the 10th Calendar Day of Every Month Volume 11, Number 12, December 2017 Written by Brooke Thackray NOW AVAILABLE! Thackray s 2018 Investor s Guide is now available in major bookstores. Link to online bookstores via my website: com/index.php/investors-guide Market Update Surprise - Possible New Year s Surprise Ahead! The S&P 500 has maintained its upward trend for many months. There has been a lack of a strong catalyst to trigger any sort of correction. In a low volatility environment, the market generally needs some sort of shock to cause it to change direction. Overall, earnings have been decent, and the economic backdrop has been positive and supportive of stock prices. Seasonal trends are supportive of the stock market performing well. The expectation is that the current positive stock market trend will carry forward into S&P 500 Technical Status The stock market is in good shape technically. Setting all-time highs as it plods higher without any significant corrections. Yes, the stock market is overbought, but it can remain overbought for a significant amount of time. At the current time there is a lack of a negative catalyst to shock the S&P 500 into a significant correction. On a seasonal basis, the stock market tends to be positive at this time of the year. Probably the biggest challenge for the stock market will come in the New Year. Although January has over the long-term been a strong month in the stock market, in the last ten years it has been negative six times. A break below 2575 for the S&P 500 would be concerning.

2 Symbol Horizons Seasonal Rotation ETF (HAC : TSX) Portfolio Exposure as of November 30th, 2017 Holdings Canadian Dollar Exposed Assets % of NAV Equities HXT Horizons S&P/TSX 60 Index ETF 29.5% HXF Horizons S&P/TSX Capped Financials Index ETF 5.0% United States Dollar Exposed Assets Equities HXS.U Horizons S&P 500 Index ETF 16.3% XLI Industrial Select Sector SPDR Fund 13.0% XLB Material Select Sector SPDR Trust 7.5% IWM ishares Russell 2000 Index ETF 5.9% FHD First Trust AlphaDEX U.S. Consumer Discretionary Sector Index ETF 5.5% XLK Technology Select Sector SPDR Fund 5.0% XLF Financial Select Sector SPDR Trust 4.0% FHF First Trust AlphaDEX U.S. Financial Sector Index ETF 3.0% FHG First Trust AlphaDEX U.S. US Industrial Sector Index ETF 2.6% FHM First Trust AlphaDEX U.S. US Materials Sector Index ETF 2.6% US Dollar Forwards (November 2017) - Currency Hedge ** -0.4% Cash, Cash Equivalents, Margin & Other 0.5% Total ( NAV $207,412,441) 100.0% ** Reflects gain / loss on currency hedge (Notional exposure equals 39.5% of current NAV) The objective of HAC is long-term capital appreciation in all market cycles by tactically allocating its exposure amongst equities, fixed income, commodities and currencies during periods that have historically demonstrated seasonal trends. The Thackray Market Letter is for educational purposes and is meant to demonstrate the advantages of seasonal investing by describing many of the trades and strategies in HAC. 2

3 Do you remember January 2016? I do. What happened? In December 2015, the S&P 500 had just come off a strong gain of over 8% in October and a nominal gain in November. The month of December ended up being negative, but the overall consensus was that the stock market stood on solid ground to advance higher in The stock market corrected sharply in January and into mid-february of There was not a strong negative catalyst, there was not a strong reason for the correction. Nothing. It is as if everyone came back from the holidays and said, these valuations don t make sense and it is best to take some money of the table. The stock market s correction was swift and steep. The S&P 500 ended up having a drawdown greater than 10%%. This year, investors are riding the wave of positive returns month after month in the S&P 500. Is it possible that the same phenomenon might occur again, with investors returning to the stock market in the new year with a sense of sobriety, being net sellers and forcing the stock market down? No one knows for sure, but it is possible. If a January correction does occur, it is not necessarily bad news. January corrections are often followed by sharp rallies. A case in point is the rally that began in mid- February of 2016 following the January correction. By the time mid-february arrived, investors basically rationalized that the stock market had corrected enough and started to push it higher. The stock market continued up on its own volition. There was not a strong catalyst at the time. There was not a Draghi moment (In 2012, Draghi boosted the markets by saying he would do whatever it takes to sustain the euro and the markets). When the stock market corrects in the favorable sixmonth period (October 28th to May 5th), it tends not to stay down for long or have protracted downturns. From 1950 to 2016, the S&P 500 has only suffered losses of 10% or more, twice in the favorable six-month period for stocks. Yes, the S&P 500 does correct in the favorable six-month period for stocks, but the corrections tend to be less severe and not last as long. If a January correction were to occur, it would probably represent a good buying opportunity. Santa Claus Rally From 1950 to 2016, December has been the strongest month of the year on average, with an average gain of 1.6% and positive 75% of the time. Different investment pundits refer to the Santa Claus rally at different times, but it is generally the period just before and after Christmas. One of the better ways to take advantage of this seasonal phenomenon is by investing in the Nasdaq from December 15th to January 23rd. In this period, from 1971 to 2017, the Nasdaq has produced an average gain of 3.9% and has been positive 72% of the time. More importantly, the Nasdaq has outperformed the S&P % of the time in this period (see Thackray s 2018 Investor s Guide, page 151). If the stock market were to correct in January, there is a good possibility that the Nasdaq would underperform the S&P 500 from December 15th to January 23rd. This does not mitigate the value of the strategy of investing in the Nasdaq at this time of the year, as the value provided by the successes of the strategy have outweighed the losses that have occurred when the strategy has not worked. Nevertheless, it would be wise to look to exit the trade if the Nasdaq showed continued weakness in its seasonal period. January a month of musical chairs What sectors of the stock market are set to outperform in January? Although there are some sectors of the stock market that tend to outperform in January, it is generally a month of sector rotation. Investment managers jockey their positions to try and get a jump on the stock market in order to beat their benchmarks. The big question is: Are the previous leaders going to continue to lead or are the lagging sectors which have typically developed into good value propositions, going to lead? This battle creates an increase in sector volatility. Even sectors of the market that are in their seasonal periods, such as the industrial sector tend to underperform in a brief period of approximately three weeks at the beginning of January. The industrial sector has a seasonal period from October 28th to December 31st and then from January 23rd to May 5th. In the brief period from January 1st to January 22nd the industrial sector has produced an average loss of 0.9% and only been positive 50% of the time from 1990 to There is really no substantial seasonal reason for this interim weak period, other than the market is trying to re-establish which sectors of the stock market are going to be the leaders. Sometimes it is better to step back from sector investments and take on broad market positions while the stock market sorts itself out especially from higher beta sectors of the stock market if the stock market is in a correcting mode. Once seasonal sector leaders have been established, usually in the second half of January, money can be rotated into those sectors from broad market positions. There can be some exceptions to the stepping back strategy of increasing broad market positions in lieu of higher beta positions. There are some sectors of the stock market that if they have corrected sharply in December, represent a good opportunity. Over the last few years, the decline in silver and gold in December has lead to a good buying 3

4 opportunity in the last days of December (discussed later in newsletter). What the HAC is going on? In the month of November, HAC was fully invested in the stock market. At the beginning of the month, HAC had relatively small positions in the consumer discretionary, materials and industrials sectors compared to previous years. Later in the month the position sizes were increased in the materials and industrials sectors. HAC also entered into the retail sector fairly late in the seasonal trade, waiting for the sector to start showing strengthbefore taking on the position. The retail sector made a positive contribution to the portfolio and was a successful trade. HAC started to sell off its Canadian financial sector late in November as the Canadian banks started to release their earnings. Although the Canadian banks mostly had solid earnings, investors started to sell of their Canadian financial positions late in November. Although the sector is typically a core position of most investor portfolios, Canadian financials can underperform in December if they have had a strong run since their Q3 earnings releases. Typically, HAC looks to enter into the U.S. financial sector and small cap sector in mid-december. This year the sectors started to show strength in late November and as a result, HAC took initial positions in the sectors. For November, HAC was generally long USD relative to the CAD. Overall, the position was approximately flat for the month. For most of the month, HAC maintained its relatively small position in natural gas, exiting shortly before month end. Since the beginning of its seasonal period in early September, the price of natural gas was in a trading range, but down from the start of its seasonal period. The position ended up having a negative impact on the portfolio. sector has resumed its tendency to outperform at this time of the year. The sector is at the bottom of its trading channel which is a positive technical development and is supportive of a move higher in the near future. My Call: The technology sector will probably start to outperform the S&P 500 in the near future and outperform into the beginning of January. Industrials - leading the stock market higher... but for how much longer? Seasonal Opportunities Technology sector- drop just before seasonal weak interim period The technology sector typically performs well from early October to late January. There is an interim period from December 6th to December 14th where the technology sector typically performs poorly. From 1990 to 2016, the technology sector has on average lost 1.9% and only been positive 25% of the time. This year, it appears the short-term technology swoon occurred early as the sector started to underperform the S&P 500 in the final days of November. Is the swoon over? Possibly, which could mean that the As I have pointed out in the past, over the last few years, the industrial sector has been moving in steps relative to the S&P 500. It performs at market for a few months and then outperforms, then performs at market again. Recent- 4

5 ly, the industrial sector was at the bottom of its trading range representing a good buying opportunity. Since that time the industrial sector has moved closer to the top of its trading range. It is possible that the sector could breakout upwards once again and establish a new trading range, but it is also possible that the sector could move to the bottom of its trading range, especially once it hits its interim seasonal period of weakness which lasts from January 1st until January 22nd. In this period from 1990 to 2017 the industrial sector has produced an average loss of 0.9% and has only been positive 50% of the time (see Thackray s 2018 Investor s Guide, page 129). My Call: The industrial sector will probably perform at market in the short-term and proceed to the bottom of its trading range in early January, setting up for another strong seasonal period starting in late January. U.S. Financials - Breaking out? underperform over the next few weeks. The sector is still expected to outperform overall until the end of its seasonal period in mid-april. A possible dip ahead could provide another buying opportunity. My Call: The U.S. financial sector will probably perform at market or possibly underperform, until late January, at which time it will be another good buying opportunity for the sector. U.S. Materials - Strong run from August through November has led to muted gains recently The U.S. materials sector had a strong run from August and into November and outperformed the S&P 500. After a brief period of underperformance for the sector in November, the sector has been consolidating relative to the S&P 500. It is possible that this could be leading to a good opportunity. The sector does have an interim weak seasonal period from January 6th to January 22nd (see Thackray s 2018 Investor s Guide for details). It is also possible that the main benefit from this seasonal trade may come later in January. It is possible that the U.S. Financials are breaking out, but not necessarily. The U.S. Federal Reserve is expected to raise its benchmark rate on Wednesday December 13th, which is approximately when the seasonal period for the sector starts. This year, the financials have outperformed the S&P 500 starting in the latter part of November and are now just above their trading range relative to the S&P 500. What is concerning is that the sector has been showing signs of weakness a few days before the Federal Reserve is expected to raise its benchmark rate. It is possible that the sector has already priced in rate increase and could My Call: The U.S. materials sector will probably perform at market until the end of the year and then underperform until later in January, setting up for a good run from January into April. Small Caps- Bounce into new year? The small cap sector could be setting itself up for a possible bounce to start its seasonal period. The sector has been trading in a range since February. It looked to be starting 5

6 its seasonal period in November but has since pulled back on a relative basis compared to the S&P 500. Nevertheless, the seasonal period for the small cap sector starts on December 19th and finishes on March 7th. My Call: The sector will probably perform at market or underperform up until late January, at which time it will probably start to outperform the S&P 500. Retail - Successful seasonal trade, but watch out for December weakness Everyone hates the retail sector..well almost everyone. In October and November I was travelling and many investors that I met did not want to hear anything about the retail seasonal trade because Amazon was killing the retail sector. I agree, Amazon is having a huge effect on the sector, but that does not mean that it cannot be a good investment in its seasonal period. The retail sector started to improve its relative performance compared to the S&P 500 in the early part of November and outperformed it during its seasonal period which finished on November 29th. My Call: The small cap sector will probably perform at market until the new year and then outperform in the last two months of its seasonal period. Consumer Discretionary - Chugging higher The consumer discretionary sector performed very well in November. The sector has shown signs of starting to weaken in its relative performance compared to the S&P 500. My Call: The retail sector will probably underperform the S&P 500 up until the start of its next seasonal period in late January. Natural Gas - Stuck in a trading range Natural gas has been stuck in a trading range since the beginning of its seasonal period in September. The trade finishes on December 21st and at which time, natural gas prices have a historical tendency to sell off from December 22nd until December 31st. 6

7 It is not a coincidence that December is the favorite month for the Federal Reserve to raise its benchmark rate. It seems that silver digests the rate increase for two weeks and then starts its upward move. Silver has a seasonal period from January 1st to March 31st. Typically, most of the gains are made in the beginning of the seasonal period. My Call: Silver will probably bottom sometime later in December and represent a good buying opportunity for most of its seasonal period from January to March. Gold - Fed meeting digestion could lead to a good opportunity Like silver, gold has also corrected in December over the last few years, presenting a good bounce at the beginning of the year. My Call: Natural gas prices will probably end up somewhere in its trading range by the end of its seasonal period. The next seasonal period starts in March. Silver - Setting up for a rally at end of year? Silver has not performed well recently, but this is not unlike the finish to the last few years where silver has corrected sharply in December and presented a good buying opportunity at the end of the month, or the beginning of January. I have written about this phenomenon in my December newsletters over the last few years. My Call: Gold will probably bounce once again in the month of January and possibly into February. Gold miners - Could be setting up for a brief rally Gold miners followed the same general pattern as gold and silver bullion. The only difference was the stronger magnitude of the bounce at the beginning of the year. It is possible that we could see the same situation as we have seen over the last three years, where a December correction lead to a rally at the beginning of the year. 7

8 Recent My Call: Gold miners will probably follow the lead of silver and gold and perform positively in January. Canadian Dollar- Recent consolidation could lead to fallout next year The Canadian dollar has been in a trading range since late October. On a seasonal basis, the Canadian dollar can perform well in the last two weeks of December, but then tends to perform poorly in January and February. Currently, the Canadian is looking to break to the downside of the trading range once the new year starts. Last week, I tweeted (@BrookeThackray) on a few stocks that were in their seasonal periods. All of the stocks were from my Investor s Guides... a shameless attempt to plug my new book. The tweets all included technical graphs. Dec. 6 - H&R Block up big time after releasing better than expected earnings. H&R Block seasonal period Oct. 28th to Mar 31st. From my 2016 book. Dec. 4 - Costco initially faltered in its seasonal period which lasts from October 4th to December 1st. Recently...taken off like a rocket. Seasonal period just ended. Careful... most of December tends to be weak for Costco. Strategy in my 2018 book. See page 61. #Costco #COST Dec. 4 - Sun Life Financial has been outperforming the TSX Composite Index in its seasonal period from October 10th to December 5th... Careful, the seasonal period for Sun Life finishes tomorrow. Sun Life Financial... NEW strategy in my 2018 book. See page 137 for details. #SLF #SunLife Dec. 4 - UPS - breaking out... Seasonal period from Oct 10 to Dec 8. Really strong seasonal trend. After faltering at beginning, UPS roaring back. Careful... UPS tends to perform poorly after its strong seasonal trend finishes on Dec 8th. For details see my New 2018 book pg 141. Dec. 4 - Canadian Tire...outperformed TSX in seasonal period from Oct 28th to Nov 30th. Careful...Canadian tire coming up to worst month of the year on average... avg loss since 1996, positive 24% of the time. New seasonal strategy in my 2018 book. See page 33 for answer on which month Dec. 4 - Cameco breaking out in its seasonal period from October 4th to January 24th. Cameco is a new seasonal strategy in my 2018 book...page 71. My Call: The Canadian dollar will probably stay in a trading range until the end of the year and then underperform the U.S. dollar up until mid-march. 8

9 Brooke s Rant Boring % We are at the time of the year when pundits are asked to make their forecasts for next year. Inevitably, the forecasts on the S&P 500 level are mostly the same. The typical prediction is for the S&P 500 to increase by 8 to 10% in the next year. You are a bull if your prediction is 10% and a bear if you predict 8%. Of course there is the occasional pundit forecasting a huge drop or increase, but these are usually the same pundits that make the same forecasts every year. They are the ones that are either perma-bears or perma-bulls. I did find it interesting that Jeremy J. Siegel, professor of finance at the Wharton School of the University of Pennsylvania who wrote the book, Stocks for the Long Run, is currently advocating that the stock market may only offer low gains next year ( stocks-to-take-a-breather-in-2018-says-whartons-jeremy-siegel.html? source=twitter%7cmain). Siegel has been perennially been held up as an iconic anti-market timer. His book strongly advocates the position that investors should not time the stock market. In the past he has always given forecasts that have been at the top end of the range of other analyst forecasts, i.e., above 10%. In Jeremy Siegel s world, Jeremy Siegel has now turned bearish. Anyhow, I am not sure that it matters, as it is generally best to ignore the quantitative forecast levels of investing pundits. The forecasts can be interesting, but they are of little value. What is more important is determining the sector leaders and risk levels within whatever methodology or mandate you follow. My own personal viewpoint of the investment world is that it is shaped by the seasonal trends of when the major stock markets tend to perform well and what sectors tend to outperform and when. I believe that the stock market will continue to provide better returns in the favorable six-month period for stocks from October 28th to May 5th, compared to the other six months of the year. I also believe that over the long-term, sectors of the market will perform better during certain periods of time of the year. This will not always the case, but on average seasonal tendencies will prevail and add value by giving superior risk-adjusted returns. So, what is my prediction for an increase of 9% for the S&P 500. There you have it...right down the middle of the average pundit s stock market forecast. Boring. Disclaimer: Comments, charts and opinions offered in this report are produced by com and are for information purposes only. They should not be considered as advice to purchase or to sell mentioned securities. Any information offered in this report is believed to be accurate, but is not guaranteed. Brooke Thackray is a Research Analyst with Horizons ETFs Management (Canada) Inc. ( Horizons ETFs ). All of the views expressed herein are the personal views of Brooke Thackray and are not necessarily the views of Horizons ETFs, or AlphaPro Management Inc., although any of the opinions or recommendations found herein may be reflected in positions or transactions in the various client portfolios managed by Horizons ETFs, including the Horizons Seasonal Rotation ETF. Comments, opinions and views expressed are of a general nature and should not be considered as advice to purchase or to sell mentioned securities. Horizons ETFs has a direct interest in the management and performance fees of the Horizons Seasonal Rotation ETF (the ETF ), and may, at any given time, have a direct or indirect interest in the ETF or its holdings. Commissions, trailing commissions, management fees and expenses all may be associated with an investment in the ETF which is managed by Horizons ETFs Management (Canada) Inc. The ETF is not guaranteed, its values change frequently and past performance may not be repeated. The ETF may have exposure to leveraged investment techniques that magnify gains and losses and which may result in greater volatility in value and could be subject to aggressive investment risk and price volatility risk. Such risks are described in the ETFs prospectus. The prospectus contains important detailed information about the ETF. Please read the prospectus before investing. While the writer of this newsletter has used his best efforts in preparing this publication, no warranty with respect to the accuracy or completeness is given. The information presented is for educational purposes and is not investment advice. Historical results do not guarantee future results Mailing List Policy: We do not give or rent out subscriber s addresses. Subscribe or Unsubscribe to the Thackray Market Letter: Please visit alphamountain.com. 9